In this article, we will discuss the distinction between tokens and coins in the world of cryptocurrency. As this is a topic commonly misunderstood, it is worth understanding the difference between these two entities.
People often use the term "coin" to refer to what other people would call a "token" and vice versa. However, these two forms of digital assets differ widely in many aspects.
The following explanations will provide clarity on what coins and tokens really are and how they are used in blockchain technology.
The official definition of a digital coin is a digital asset that is local to its own blockchain. Examples include Bitcoin, Ether, and Litecoin, each having a native currency unique to their blockchain.
From this explanation, we can derive that bitcoin functions on the Bitcoin blockchain, NEO functions on the NEO blockchain, and Ether operates on the Ethereum blockchain.
All these coins remain disembodied and exist as data on a digital database. When crypto coin transactions are made, no physical commodity is exchanged. Computers simply verify the transfer and record it on the blockchain.
Crypto coins are used much like money in the real world is used. These digital coins often serve the sole purpose of being used as a means of payment. Coins like bitcoin and litecoin can be compared to ordinary coins you keep in your wallet.
Their purposes include:
Using Bitcoin as an example, consider the following: bitcoin can be used to pay for various online products and services. It is also continuously becoming an acceptable commodity in real-world markets. You can store bitcoin for long periods of time without it changing and use it to purchase something in the future. Online items and services are priced in bitcoin.
Those, as mentioned above, are the only true purposes of bitcoin. It cannot be staked or used to operate an application. It is solely used as money.
Other digital coins may offer more possibilities than simply serving as a form of money.
Although crypto tokens are often confused with coins, there is a significant difference between the two.
A crypto token is manufactured on an existing blockchain. Because of the advanced nature of Ethereum's smart contracts, the majority of tokens are built on this platform. These tokens are known as ERC-20 tokens.
Apart from ERC-20 tokens, other networks like NEO, Stratis, Waves, and Lisk also offer the possibility of creating tokens. Virtually anyone can create a custom token on any one of these networks.
Surprisingly, you don't need to be a technological expert to create a new token. However, it wouldn't take as long for an experienced programmer. As a developer, you will be required to spend native coins when creating a new token on a blockchain.
For example, if a user creates a token on the Ethereum network, they will need to pay Ether to the miners who validate the token.
All transactions involving tokens will require a fee, besides the creation fee, to be paid. All applications built on the Ethereum platform will use Ether coins as payment to transfer tokens between users or between the application and the user.
This fee is comparable to the required fee in coin transactions that serve as payment to the miners who secure the network.
Most tokens are created to be used with decentralized applications. It is up to developers to decide how many tokens will be made and where they will be sent.
Token are frequently used as activation payment for various features of the applicable application. For example, when Binance users trade using Binance tokens, their transactional fees are reduced by half. Moreover, the Musicoin platform allows access to features, such as streaming a song or watching a video, to users holding Musicoin tokens.
Tokens are also created for the entirely different purpose of representing a physical thing. For example, if someone wishes to sell their house using a specific smart contract, a token can represent the value of the house.
An appropriate example of tokens being used in this way exists on the WePower platform, where tokens represent electricity. This dApp enables users to sell and buy electricity using smart contracts and the blockchain. A WPR token constitutes a certain amount of energy.
Creating a token is a big time and resource saver as developers don't need to create their own blockchain to accomplish this fabrication. The security measures of the native blockchain can be applied, and the cryptocurrency features utilized.
If this were not the case and developers had to create a new blockchain with its own native coin, they would also have to find miners to verify transactions.
For a blockchain to be properly secured, many miners would have to be converted. Therefore, it is extremely advantageous that numerous developers can run their applications on a common blockchain.
To explain how tokens are used in decentralized applications built on blockchains, we will consider an appropriate example.
Civic uses tokens called CVC, and their application records encrypted identities present on the Ethereum blockchain. Civic offers a more reliable and affordable way of checking identities. But how does it work?
Say you were going on holiday to a foreign country. During your travels, you would have to confirm your identity at various points along the way. Let's imagine the airline you were flying with is a partner of Civic. You would then be able to send your information to the company through your Civic app. Your details are fully encrypted and stored on the device, preventing theft. An incorruptible method such as a fingerprint scanner can be implemented to verify that you're indeed the owner of the data.
You can verify your identity using this same device at every point during your travels. The various companies requesting your information validate your data using the blockchain. Third parties will increasingly trust your stored digital identity as the application is used more.
The CVC token that Civic uses is used to pay the users who verify your identity and keep a record of your information on the blockchain.
People are encouraged to use Civic because they are rewarded in CVC paid by companies needing verification of documents. This way, an economy is generated where each party is rewarded for participating.
Because Civic is built on the Ethereum platform, each transaction requires Ether because miners need to be paid for their work.
Let's look at the various classifications of tokens.
The majority of tokens issued by an Initial Coin Offering are security tokens. If a person buys such tokens, they are investing in the Initial Coin Offering with the hope of generating a profit.
If a token represents some sort of equity or stock in the company issuing it, it is referred to as an equity token. However, not many companies have implemented equity tokens into their systems as there are not many regulations and guidelines on the legal aspects of using equity tokens.
Utility tokens are often referred to as application tokens. These tokens offer users access to products and services. They are rare because of the fact that most tokens increase in value because their supply is limited.
The purpose of payment tokens is exclusive to be used to pay for products and services.
Tokens may likely fall under more than one of these classifications. The definitions of the classes of tokens are likely to change and adapt as the digital space evolves. As tokens and Initial Coin Offerings are still relatively new concepts, the law has not quite established concrete guidelines concerning their operations.
The difference between coins and tokens should now be clear to you. The chief distinguishing factor is that coins are native to their blockchain while tokens are fabricated on another blockchain.
Hopefully, these explanations have also shed some light on the common uses for coins and tokens. Coins are more frequently used as money to pay for goods or services, although some coins have different functions. They can also be used as fuel, as payment for validating a transaction, or to fuel token transactions and smart contracts.
On the other hand, tokens exist to be used on decentralized applications, where their purposes will depend on the app. They may provide access to voting rights, rewards, or be used for transactions occurring on the app.